Time Warner-Comcast deal would have created unwanted Internet 'gatekeeper', regulators say

Regulators declared victory Friday after Comcast and Time Warner Cable confirmed that they had aborted their $45 billion merger, which would have created a truly national cable company with unprecedented control over the future of the country's television and broadband markets.

The unraveling of the deal came after Attorney General Eric Holder told Justice Department lawyers at a meeting two weeks ago that they had his support in deciding to challenge the transaction, according to a person with knowledge of the discussions who spoke on the condition of anonymity because of the sensitivity of the issue.

The deal would have brought together the country's two largest cable operators at a time when the Internet acts as the ultimate gateway for information and entertainment, and when vast technology changes revolutionize how people watch and pay for television.

Combined, the companies would have controlled as much as 57 percent of the nation's broadband market and just under 30 percent of pay television service. That threshold appeared to be too much for federal regulators, who had signaled that they were leaning toward blocking the deal.

The Justice Department confirmed that it had significant concerns that the proposed merger "would make Comcast an unavoidable gatekeeper for Internet-based services that rely on a broadband connection to reach consumers."

"This is a victory not only for the Department of Justice," Holder said in a statement, "but also for providers of content and streaming services who work to bring innovative products to consumers across America and around the world."

On April 9, lawyers at the Justice Department briefed Holder that they were leaning toward challenging the transaction, according to the person with knowledge of the discussions. The rationale was that a combined company would wield too much control over the Internet and would have an increased ability and incentive to thwart competitors from reaching consumers, this person said.

Holder then responded that they had the authority to go forward and take steps to challenge the transaction, this person said. That set off a process that culminated Wednesday with a meeting between Comcast and Justice Department officials.

Tom Wheeler, chairman of the Federal Communications Commission, said Friday that the decision to abandon the deal was in the best interest of consumers.

"Today, an online video market is emerging that offers new business models and greater consumer choice," he said in a statement. "The proposed merger would have posed an unacceptable risk to competition and innovation, including to the ability of online video providers to reach and serve consumers."

On Friday, the companies pledged to move forward after 14 months of devoting a tremendous amount of time and resources to the failed transaction. For Comcast, costs related to the transaction totaled $237 million in 2014.

Robert D. Marcus, chief executive of Time Warner Cable, said in a statement that the company has been "laser-focused" throughout the deal process on improving the company's operations and was confident that it would deliver value to shareholders.

Announced with much fanfare in February 2014, the transaction faced intense scrutiny by government regulators, who feared that the deal harmed competition and was not in the public interest. It also set off loud criticism from lawmakers, consumers, public advocacy groups and media and technology companies.

Comcast had pitched the deal as an attempt to create a "world-class blue-chip company committed to innovation" that would lead to cutting-edge video services and faster Internet speeds.

But concerns grew that the transaction would place too much power over the future of the country's entertainment and communications infrastructure in the hands of one company. Com-cast also owns the entertainment group NBCUniversal, which it acquired in 2011.

With a national platform, Comcast would have been able to build a stronger rival to streaming services like Netflix that threaten the traditional television business. It also could have thwarted television networks' attempts at creating their own streaming services by forcing them to hold back programming. At the same time, the company would have wielded more power over the broadband networks that those services need.

Critics said customers would end up paying more for declining service and that the company would stave off competition and innovation in the online video business. Others said the deal would result in a lack of independent and diverse voices in television. The company also was scrutinized for failing to live up to commitments it had made in previous deals, like the NBCUniversal transaction.

"It shows that even big cable has to listen to the American people who spoke loudly and clearly on this and who understood how important this was to keep the communications infrastructure free and open, and protect it from gatekeeping," said Michael Copps, a former Democratic member of the Federal Communications Commission and an adviser to the Common Cause public interest group.

Comcast officials this week met with officials from the FCC and the Justice Department, who signaled that there opposition to the merger.

The collapse of the deal effectively put an end to a series of other transactions that would have reshaped the media industry. Charter Communications, the regional cable operator, will no longer acquire some of the Time Warner Cable markets that Comcast was planning to divest. Charter's $10.4 billion deal for Bright House Networks also was contingent on Comcast's purchase of Time Warner Cable.

Time Warner Cable serves Lexington, Louisville and many other Kentucky cities. It also offers Internet service in Lexington and much of the rest of Kentucky.

Lexington approved a 10-year cable franchise agreement with Time Warner Cable in late December after months of tense negotiations between the city and the company. City officials said they had been inundated with calls from Lexington residents angry over service.

The agreement approved in December calls for stiffer penalties if the cable operator violates key customer protection clauses in the contract. The 10-year franchise agreement will not be effected by Comcast's decision to walk away from the merger, city officials said Thursday.

"All of the customer service items that we were able to extract in the new agreement stay," said Scott Shapiro, an adviser in Mayor Jim Gray's office.

Herald-Leader staff writer Beth Musgrave contributed to this report.

Never miss a local story.

Sign up today for a free 30 day free trial of unlimited digital access.